Passive income is one of the most popular topics in the financial sphere. Authors like Robert Kiyosaki made passive income a cornerstone in personal finance in his book “Rich Dad, Poor Dad.”
Is passive income really achievable?
What is Passive Income?
Passive income is best defined as income that you do not have to work for. Most income is earned by trading time for money – working for someone else for 8 hours each day to make money. This is how most people make money. Most people think it is the only way to make money.
Passive income can be created with investments. When you make an investment in CDs, stocks, bonds, or mutual funds, you are using your money to make more money. Some of these are not truly passive, however as they require a significant amount of time doing research. Real estate investments that were the subject of Robert Kiyosaki’s books is a very time-consuming business.
Related: Should you buy a home for your college student?
Truly Passive Income
I think the only truly passive income is from risk-free investments like certificates of deposit and US Treasury investments because these do not require any real research, nor do they make an investor take on risk. Unfortunately we all know how low the yields are on certificates of deposit and US Treasuries. There isn’t much money to be made at all!
The low interest rate environment would bring me to question whether or not passive income is really achievable given that it could take as much as $100,000 in CDs to earn a tiny $2,000 annual income from interest. If you were to buy the longest duration Treasury bond you would make just $2,850 per year and have to lock up your money for 30 years.
I don’t think passive income exists. If it does, it just isn’t as sexy as popular authors and financial commentators lead everyone to believe.
The most popular investment right now seems to be real estate. Real estate in college towns appears to be on the forefront of so-called “alternative investments.”
This got me thinking: should people buy a home for their college student? I like to use pros and cons lists, so let’s do that as we think about this issue.
Pros to Buying a Home for a College Student
There are a few reasons why I think buying a home for a college student might be a good idea:
- Capping cost inflation – A college student will likely see his or her tuition rise by 20% or more from the day one starts to graduation day. The cost to live on campus is also going up, albeit at a slightly lower rate. Purchasing a home for a college student is one way to cap the total cost of college by capping living costs.
- It might generate an income – One of my college friends had his home paid for by his parents. He also found two other college students to rent part of the small 3 bedroom house. His parents were able to make a little bit more than the mortgage payment each month, making it possible for their student to live for free. They still own the home, and it is a very valuable piece of investment real estate.
- Now is the time to buy – No one can predict the future, but homes are a lot cheaper now than they were four and five years ago. However, the cost to rent has only increased over the past four or five years. A purchase has a much better probability of turning out okay than a purchase made a few years ago.
Cons to Buying a Home for a College Student
Here are some of the cons:
- You are on the hook for the payment – The parents, not the college student, are responsible for payments on the property. Only people who can reasonably afford to make the payment every month should consider buying a home for a college student. In the worst case, you will need to pay for the full mortgage payment each month that it is not rented.
- You have to trust your child – Everyone has fun is college. Some people have clean fun. Others have destructive fun. Parties will be thrown in your house – your house which won’t be repaired by your new college student. Consider the student’s responsibility first.
- You will be an absentee landlord – Most of the time, people move a few hundred miles away for school. This means that you will live far away from your investment property, unable to keep tabs on it during and after your college student stops using it. For control freaks, this distance might be concerning.